How does a company decide when it is going to split its stock?

There are no set guidelines or requirements that determine when a company will split its stock. Often, companies that see a dramatic rise in their stock value consider splitting stock for strategic purposes. Companies may believe that splitting the stock allows more investors to afford investing in the stock at a lower price. Companies want to create greater liquidity in the shares and support the price. Studies show that split stocks rise on average 7% in the first year after splitting and average 12% growth after three years.

Apple split its shares in June 2014. Prior to the split, Apple’s shares were trading above $600 a share. The company then executed a seven-to-one stock split, after which shares traded around $90. Thus, for every share an investor owned, he received six additional shares. The liquidity in Apple stock increased substantially due to the split. Before the split, Apple had a share float of around 860 million shares. After the split, Apple had around 6 billion shares outstanding. Before the split, Apple’s market capitalization was around $559 billion. After the split, due in part to some good trading days, Apple’s market capitalization increased to around $562 billion.

Not all companies decide to split their stock even when the price is very high. Berkshire Hathaway, managed by Warren Buffet, is one such example. Berkshire Hathaway A Shares trade around $218,000 a share as of 2015. Buffett began buying shares in the troubled textile company in 1962 when it traded slightly over $11 per share. Buffett has said he resists splitting the stock because he wants to avoid short-term speculation in the stock. Rather, he views Berkshire as a long-term investment. Still, the company has a more affordable class B, known as Baby Berkshire shares, which traded around $150 a share as of 2014 and actually underwent a split in 2010.

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